Rae Woods (00:02):
From Advisory Board, we're bringing you a Radio Advisory. My name is Rachel Woods. You can call me Rae. Experts are saying that 2022 could be the worst year financially for hospitals since the beginning of the COVID-19 pandemic. If I'm honest, hospitals are kind of facing an existential crisis around their future, because the majority of hospitals are predicted to have negative margins this year. Today I want to talk about what's behind the financial reality for hospitals and frankly talk about whether there's hope for the future for them. I've invited three advisory board experts. We've got Colin Gelbaugh, Aaron Mauck, and Monica Westhead. Colin, Aaron, Monica, welcome to Radio Advisory.

Aaron Mauck (00:55):
Thank you.

Colin Gelbaugh (00:55):
Thanks for having me.

Monica Westhead (00:56):
Thank you.

Rae Woods (00:56):
Aaron, this is your first time on the podcast. I cannot believe it has taken me this long to get you on Radio Advisory. Monica, Colin, any advice for Aaron before we get into things?

Colin Gelbaugh (01:07):
Stay on Rae's good side.

Aaron Mauck (01:09):
I'll do my best.

Rae Woods (01:10):
No, that's dangerous advice, Colin, because then we're going to start tapping Aaron a lot if he gets too close to my good side.

(01:30):
We're here to have kind of, dare I say, a somber conversation, an honest conversation about what's happening when it comes to hospital financials. I am seeing headline after headline that 2022 has been the most difficult year financially for hospitals, at least since the beginning of the pandemic. At a high level, how would you describe the state of hospital finances?

Aaron Mauck (01:54):
It's pretty challenging at present for most hospitals. It goes from either moderately bad to overtly terrible, is probably the standard across the sector.

Rae Woods (02:06):
Colin, what are you hearing?

Colin Gelbaugh (02:07):
I agree with Aaron, it's certainly not ideal, but broader picture. Keep in mind that we haven't really hit a breaking point where we've seen a lot of closures necessarily, but margins still are certainly down compared to prior years.

Rae Woods (02:22):
You're completely right that there haven't been mass closures, but I do think one of the reasons why we wanted to have this conversation is people are a little bit worried about some of the things that they have seen in the news.

Monica Westhead (02:34):
Well, we have seen significant closures in the post-acute space. I think that is where it's definitely getting a little bit scary with obviously the challenges, the financial challenges go across the entire healthcare delivery system, but post-acute providers tend to be hit among the hardest out of the entire industry. And that has ripple effects for hospital finances as well.

Rae Woods (02:57):
That's right. And we've also seen organizations make some big structural changes in terms of their administrative footprint, have some big layoffs, signals that financially, things are not great.

Aaron Mauck (03:11):
Right. So closures are probably the last thing to happen, of course, but we've already seen very significant dark clouds on the horizon when it comes to the sort of decisions that are being made. Pulling back on certain growth strategies, reevaluating new projects. To your point, reconsidering administrative footprint, probably reevaluating the viability, economic viability of certain units. Those kinds of signals are there, certainly, and those reflect probably that overarching challenge that folks have been seeing over the course of the last year, but also some forward direction of what they expect coming into 2023.

Rae Woods (03:50):
Let's forget the headlines for a second. What are you hearing from hospital and health system and post-acute leaders right now? What's the kind of tone of the conversations that you have when it comes to the financial reality for hospitals today?

Aaron Mauck (04:03):
Pretty considerable anxiety from senior leaders in relation to this. Most of them feel like they have a fairly strong strategy. They trust their fundamentals. They are trying to make sense of the root causes of this because it was a little bit unexpected, and trying to find some strategies, short term strategies that will help to bridge towards their long term approach. So if they can find a way to stay financially viable through this time, weather the storm, they hope that their fundamentals will lead them through and ultimately they'll get back on a path to growth.

Monica Westhead (04:34):
I definitely hear anxiety from both health system and post-acute leaders about the future. There's a little bit more concern around the interdependence of the different pieces of the healthcare industry and realizing that if one part of the industry starts to fail, the others are kind of dragged down with it. That is where I will say I've been hearing a lot more concern over the last few months when I talk with health system leaders about an inability to discharge people to post acute care, just because the post acute facilities are understaffed or they may have closed entirely. You can't discharge someone, you can't get a new DRG in that bed, so it creates this really challenging cycle where no one is able to get the revenue that they need in order to get their footing back.

Rae Woods (05:25):
Yeah. And Monica, you're getting at exactly where I wanted to go next. Aaron mentioned the root causes of this. My big picture question is how do we actually get here in the first place? What are the factors that are impacting the financial instability of hospitals right now?

Aaron Mauck (05:43):
Well, we already pointed to one, of course one, the one that's gotten the most attention has been staffing, which is a persistent challenge. It reflects sort of a broad issue related to availability, but also renegotiated contracts, the use of travelers when it comes to the nursing side, just general challenges around churn that we've seen. And the net effect has been massively rising cost of labor and that has not really alleviated itself fully.

Rae Woods (06:07):
And hopefully our listeners are remembering those challenges because we've talked about those quite a few times over the last couple of months. Monica, you've been on the podcast talking about those exact challenges this year.

Monica Westhead (06:18):
And I think what's interesting about the staffing challenges and what I'm hearing from organizations is this feels very different than it did 10 or 15 years ago when people were talking about we have to find a way to cut labor costs. I think there is knowledge that labor is going to continue to be a huge part of spend, and certainly organizations want to reduce dependence on agency and travel labor because that does come at a premium. But at the same time, there is an understanding that labor is just really costly right now, and it has to be an area of investment if you want to be able to operate

Colin Gelbaugh (06:52):
Labor, certainly the biggest expense item, but supplies, drugs, purchased services, expenses are all rising. And that also has to do with other macroeconomic factors, as everyone knows that all industries are facing right now with inflationary pressures and general cost concerns

Aaron Mauck (07:12):
And those inflationary pressures aren't going to alleviate any time soon. We know that this constitutes a pretty significant challenge. There's more rapid acceleration in the healthcare space for some of those than across the economy as a whole. And we have to be attuned to those being a palpable headwind that we'll have to confront. And leaders are cognizant of that and thinking about renegotiating contracts and some of the other things that have to come with that particular pressure.

Rae Woods (07:37):
Are any of these going to resolve soon? I don't want to make light of the labor shortage problem, because it has been such a serious issue this year that's on the forefront of every single executive's mind. But dare I say, the challenge isn't quite as bad today in the middle of November as it was, Monica, the last time you came on the podcast a couple of months ago. Is it correct to say that a problem like that could resolve itself? Could any of these challenges resolve themselves on a long enough timeline?

Monica Westhead (08:10):
From a staffing perspective, I don't expect it to resolve itself. I do think that we are starting to see it stabilize. So we're not seeing the rate of departures continue to increase anymore the way that we were earlier in the year. And part of that, quite frankly and unfortunately, is since there are predictions that we may be headed into a recession, yes, healthcare jobs do tend to be attractive in a recession because they're much less likely to be laid off than service industry jobs, for example. So that may be playing into some staff members' minds. And I will say a lot of systems have also put in place strategies to try to retain people that are starting to make some headway.

Aaron Mauck (08:56):
And one thing that's related to that, and we haven't touched on as a drag on finance, has been the dynamics around demand. So there have been some shifts in demand. Demand overall, if you track it, looks like it's largely where it was pre-pandemic and we've talked to some hospitals that say they're bursting at the seams, but the kind of patient that we're seeing in the hospital is a little bit different. There's more medical admissions, there's longer length of stay and that has effects.

(09:20):
Then there are certain areas like emergency departments, where in some markets they haven't fully come back yet. Now those demand dynamics have the potential to alleviate. We don't know if we're at a rebasement point, for instance, around things like emergency departments. We may or may not be, but we do expect at some point those patients are going to come back. They're going to need to have procedures done, they're going to need those electives, they'll need to come into the ED. So in principle, that can alleviate. I think we have open questions there, but that certainly is an area that has some potential to help alleviate those financial pressures.

Rae Woods (09:53):
Just a moment ago you mentioned the length of stay issue and the complexity of patients is getting worse, and that becomes really complicated, Monica, to what you said earlier, when you've got challenges elsewhere in the ecosystem, post-acute care is closing, there's not necessarily a place to send these patients. My question is, what is so exceptional about that problem today, compared to previous years? We've been talking for a long time about challenges in the clinical space when it comes to the fact that patients are getting older, patients are getting sicker, their care is getting more complex and therefore more expensive. Why is this coming to a head right now?

Monica Westhead (10:26):
I think there are a few reasons. One is we still do have largely a very inexperienced staff across the entire healthcare delivery system because we've had so much turnover. So we still have and continue to have what we call the experience complexity gap where the complexity's getting bigger, there are fewer experienced staff who can care for those patients. The other thing that I would say here is post-acute organizations, as I mentioned, have been hit harder by some of the staffing challenges than hospitals. So when you have either issues transitioning patients to post acute care because of a lack of staff or because they can't accept those patients due to concerns about their ability to safely care for them, or you have higher readmission rates because those patients can't safely be cared for in the SNF, then you have capacity challenges in the hospital as well.

Aaron Mauck (11:21):
Yeah, you're pointing to what you could describe as a problem of staffing, patient safety, and quality that of manifesting itself really across the space. We see this in the staffing for hospitals as well. Post acute care settings are probably the hardest hit with the staffing challenge. The second hardest hit is things like med/surg units within the inpatient space. And that is where we run into that kind of challenge.

(11:47):
I think if you look in the data, we'll see it in the next couple years around quality and safety. We're going to see some significant drops reflecting that challenge that you've alluded to around the experience complexity gap. And just reflecting the fact that even if you have experienced nurses, often enough, if they're coming through traveler for instance, you don't have a cohesive care team that knows each other's patterns, that's worked together for a long period of time, that has the kind of seamless ability to deliver care the way that we probably had in much of healthcare before the pandemic started.

Monica Westhead (12:21):
It's certainly med/surg, but it's also ICU.

Rae Woods (12:23):
Yep. And so when you struggle to have sufficient experienced staff in the most acute part of the hospital, that obviously reflects all of the rest of the facility as well.

(13:42):
Colin, you started to mention some forces that frankly just feel a little bit more external. We've been talking about this uber complex problem; however, most of the drivers that we've talked about thus far happen within the four walls of the hospital itself. What's happening outside of the hospital that's driving such a dire financial situation?

Colin Gelbaugh (14:04):
There are a variety of external factors, supply chain disruptions that started years ago to stock market performance. A lot of health systems historically have gotten non-operating income that isn't necessarily there today as much as it was in the past. Those are some of the ones I would call out, Monica and Aaron, and if you have others that come to mind ...

Aaron Mauck (14:29):
Well, actually I want to double down on that non-operating income side. A lot of hospitals and systems, who strongly reliant on their portfolio, conservative portfolios though they were, for revenue generation that could allow for their growth strategies to continue. Hospitals and health systems, being as they are conservative entities, encountering the challenges that they're seeing with their portfolios right now is really probably creating an abundance of caution where they have to step back, be deliberate, think about revenue generation primarily through their traditional channels. And that is adding to that problem pretty considerably, because of course those traditional channels of healthcare, though they generate revenue, do not generate at the rate of return that the stock market has over the course of the last 10 years.

Rae Woods (15:16):
That's also such a hard position for an executive to be in today, because we're talking about all this disruption that's happening in healthcare. We're talking about all of this innovation that's happening. Competition over physicians is literally getting steeper by the day. And so it can be a really difficult moment to tell executives, you need to double down on the traditional kind of revenue streams when, especially at this time of year, looking into 2023, they're probably thinking about differentiating themselves. They're thinking about diversifying their revenue and let's be honest, that might not be possible right now, given the financial situation at some institutions.

Aaron Mauck (15:53):
I think that's what's added to the concern level is precisely that CEOs find themselves a little bit between a rock and a hard place. There is a lot of pressure on them to innovate, innovate quickly. The rest of the sector is innovating very, very quickly, and they find themselves positioned to actually slow down their innovation strategy or stop it entirely at the moment where the rest of the sector seems to be going at warp speed. And that's going to be a significant challenge. The concern of every executive at the moment is being left behind and unfortunately, doubling down on that traditional business is going to limit their ability to make the kind of strategic pivots that will be necessary in a rapidly changing market.

Rae Woods (16:35):
And it is also one of the reasons why we want to push today's health leaders to act quickly when it comes to beginning to rectify the financial situation that they're in now, especially when it comes to, let's be honest, addressing their kind of cost structure, which is a reality that is maybe less comfortable. It's certainly less sexy to talk about, but I do think that this is a reality today. How quickly do you want leaders to react to this financial situation?

Aaron Mauck (17:06):
Well, from my perspective yesterday, it probably should have happened earlier in the year, but I think people thought that some of these things were very temporary. It frankly came as a surprise. If you talk to most CFOs, CEOs, when we got out of the last COVID wave, the kind of expectation was well, we'll get a quick return of patients into the hospital space, that we have pent up demand. When is that demand going to happen? The hope was it would happen tomorrow, and we've been seeing consistent lags, and that's reflected a bit of the challenge there.

Colin Gelbaugh (17:36):
I do think that prudent and thoughtful change is necessary though, rather than making rash decisions that are going to set you up in a bad position in the long term and not accomplish your long term strategy or fulfill your commitments to your community. Things like laying off a sizable portion of your workforce can have other effects, and really impact your culture and your ability to change into the future.

Rae Woods (18:03):
So then let's talk about what we do want folks to do. And again, for the purposes of this conversation, let's maybe focus on reining in costs. What are some of the key cost management strategies that you've been seeing hospitals trying to do to address things like labor without necessarily defaulting to those big layoffs that are going to create the headline that, let's be honest, no leader wants to have right now

Colin Gelbaugh (18:25):
For most hospitals, cost pressures are not new and a lot of the targets are harder to achieve. Now, there aren't a lot of easy areas to tackle, but some areas that I would expect hospitals to look at are supply chain and standardizing the devices and the other supplies that they use, as well as administrative reorgs, as Aaron mentioned. Maybe this is a good time to implement those changes across regions, across service lines that have been hard in the past, that give you an opportunity to make changes now.

Aaron Mauck (19:05):
Yeah. We're also seeing hospitals, all hospitals essentially, go back to their payers and renegotiate on rate. There has to be some opportunities for direct revenue generation or changing rate. And as you can imagine, unsurprisingly, payers are hesitant to change or to renegotiate the existing rates that they have. But there will be some movement on that which will alleviate at least some of the cost pressure and that may yield interesting new arrangements between traditional incumbent hospitals and payers around how you manage patients or work to manage their long-term costs. We'll see what evolves out of that.

(19:41):
But certainly this is an effort that's taking place to try to address that. I'd also say, related to staffing, the good news is that many systems laid the groundwork for good relationships with their staff during the pandemic. Now, some systems did revert to layoffs and other mechanisms that alienated some of their staff or much of their staff, but many other systems worked to find solutions to keep their staff relatively whole through the pandemic. And that is yielding loyalty that is now finally reaping some rewards as staff move back away from traveler and come back to permanent positions or think about coming back to their hospitals. And so that loyalty play is certainly one that's available to hospitals and we do see them pursuing.

Monica Westhead (20:27):
I think I would both agree and disagree with that. I really don't think that organizational loyalty is going to play a big role here. I think we are still seeing a lot of turnover. We're still seeing a lot of churn in the workforce as people look for better work environments and better pay. I agree with what you said, Aaron, about the fact that organizations have made investments and they have made changes and they have put forth a lot of effort to try to make their workplaces better places to work for those individuals. But I do at the same time think we're still seeing that same churn that we've been seeing for a long time.

Aaron Mauck (21:07):
And Monica, to your point there, it can't just be money. So keeping people financially whole was not a solution. If you try to attract folks through money, they'll leave for money. And that ultimately isn't the strategy that we see really being the most appealing to staff. To your point, when we see churn, we're seeing it because of things like work-life balance, flexibility of schedules, nine to five, things that hospitals historically haven't been great at, but are finding new solutions to. And one of the long term strategies for staffing has to be a different and kind value proposition for the staff member to help to make long term solutions.

Rae Woods (21:43):
But you guys, if I'm honest with myself, focusing on labor, focusing on supply chain, those are classic cost measures to focus on. Is there anything new or frankly, are there any moves that are just going to be a lot harder that today's leaders are going to have to make because the situation is as bad as it is. Are there bigger moves that you want to see today's hospital leaders make?

Aaron Mauck (22:09):
Well, candidly, we hate to mention the R word, but the R word has to be mentioned. There's rationalization that probably has to happen here and that can mean very deliberate decisions around keeping certain units open, keeping probably certain care sites open, growth around certain hospitals. If you're have a growth strategy related to new hospital builds, thinking very deliberately about where that makes sense or where that doesn't. Now, not every market is going to run into this challenge, but certainly some markets where we've seen that kind of contraction or cost pressures, they have to be pretty deliberate and some of the players within them will have to make some hard decisions.

Rae Woods (22:46):
And the rationalization that you're talking about, Aaron, is different than where Colin started us off, which was this cautionary moment of, look, we're not necessarily seeing massive closures of hospitals, which is not just a defensive move, that is a very unfortunate reality when very serious business challenges hit an organization. What you're talking about is maybe more of a proactive but necessary move that is not whole closure of a hospital. There's a difference there.

Aaron Mauck (23:16):
Absolutely. Closing a hospital is often a Pyrrhic victory. You've solved your short term cost problem, but at the expense of your long term viability as an organization, which is precisely why many systems have been so hesitant to do that. Even with things that are hospitals or other assets that are relatively underperforming. Makes perfect sense. You wouldn't really want to do that. It also is a very, very bad signal to your entire staff and team. So you don't want to go down that direction.

(23:43):
But knowing that in the future the footprint of care is going to look considerably different, there's huge opportunities to deliberately prune for growth, just like you do with a plan. You deliberately prune so that you can have future growth. And we have to be very cognizant of the opportunities in relation to that.

Rae Woods (24:03):
None of these steps are going to be easy. Do you have a message for today's leaders who are grappling with this unbelievable complex reality? They're dealing with margins that are slimmer than ever before, most of which are negative and are going to have to make really tough decisions to tighten their belt. What advice do you have for them as people and as leaders of these organizations who are going to have to make these hard choices?

Monica Westhead (24:30):
I think one of the things that I would recommend is to understand that as an industry, we are all in this together. And I mean that from the perspective of empathy, but I also mean that from the perspective of as you think about getting your own financial house in order, if you are working with other providers who are equally struggling or struggling even more, there is some codependency that is necessary for the way that health delivery works, that is really challenging if you only think about the operations of your specific facility or your specific sector.

Aaron Mauck (25:06):
Yeah. I'd also recommend for leaders, don't hide the ball on this. Because we are precisely codependent in this respect and interdependent necessarily, communicating just how challenging it is going to help, ultimately. It helps your team because when you have bad news, it has to be delivered frankly, otherwise they don't trust you for the future. But also it's going to help to maybe drive recognition across the sector that if hospitals run into significant challenges, it has those cascade effects. True of course, Monica, on your point around post-acute care, it's true wherever you go.

(25:41):
Ultimately, down the line this impacts payers adversely. It impacts both of disruptive inference adversely. You can't lose the core of the system in hospitals. Hospital footprint may change, but the hospitals aren't going away anytime soon. And this kind of existential pressure that we're seeing coming from cost will have ripple effects that are destructive to the sector as a whole. Maybe not tomorrow, but certainly down the line if we don't address this now.

Colin Gelbaugh (26:09):
And if you are not successful at controlling costs, ultimately it's going to impact your community. And I think that can't be understated. Healthcare is a mission-driven industry and I still do believe that you need to be able to inspire your staff around that to make these changes.

Rae Woods (26:31):
Well, before we close, I kind of want to ask you a blunt question. Is there hope for hospitals, given this financial reality?

Aaron Mauck (26:42):
There is hope for hospitals. I don't think that the future of hospitals will look the same as today. I think they'll be able to deliberate restructuring. There has to be all health system leaders acknowledge this. All health system leaders have a strategy that they're putting in place to think about site of care shifts, different in kind of management of complex patients. All the things that we've talked about on the podcast quite a bit over the course of the last year.

Rae Woods (27:08):
Glad to know you were listening, Aaron.

Aaron Mauck (27:10):
Hard at listener. But it'll evolve. It will change. There's future for hospitals if we assume that the hospital will not look the same as today.

Monica Westhead (27:18):
I think that's a great point, Aaron, that there is certainly a future for this. We will always need healthcare. We will always need hospitals because there will always be care that needs to be delivered in that setting. It may look different than it does today, but this is a sector that is going to continue over time and we just need to see where it goes.

Colin Gelbaugh (27:39):
I agree with Monica and Aaron. Hospitals will be around in the future. They're an essential community need and they are resilient and have gone through some really tough times in the past and can do so in the future as well.

Rae Woods (27:56):
Well, Colin, Monica, Aaron, thanks for coming on Radio Advisory. Thanks.

Colin Gelbaugh (28:00):
Thanks.

Monica Westhead (28:01):
Thanks for having me.

Aaron Mauck (28:02):
Thank you.

Rae Woods (28:06):
If I'm honest, we've actually only had half of the conversation. We spent a ton of time today talking about the problems that are driving the dire state of hospital finances, and we started to explore solutions when it comes to things like cost cutting. But we need to continue to have a deeper conversation here, about what the identity of a hospital is going to be in the future. So make sure you check out next week's episode, where we're completely devoted to the new growth path for hospitals. And remember, as always, we're here to help.

(28:46):
If you like Radio Advisory, please share it with your networks. Subscribe wherever you get your podcast and leave a rating and a review. It's honestly the best way that we can get feedback from our listeners. Radio Advisory is a production of Advisory Board. This episode was produced by me, Rae Woods, as well as Katy Anderson and Kristin Myers. The episode was edited by Dan Tayag, with technical support by Chris Phelps and Joe Shrum. Additional support was provided by Carson Sisk, Leanne Elston, Alice Lee and Nicole Addy. Thanks for listening.